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A Compilation is a form of fullgame, where the creator usually creates a screenpack and fills it with many characters and stages from a common theme. In this sense compilations are just a collection of chars and stages.
Compilations are usually frowned upon in the M.U.G.E.N community, as they mostly have little to no effort put on them, since the creator usually just patches up a quick screenpack then jumbles a lot of characters together, often with complete disregard to different sprite styles and different gameplay (this is mostly seen in Dragon Ball compilations). There are, however, rare good compilations, where the creator will create a nice screenpack and edit the characters so they have a similar gameplay.