Compressors pack the executable, and then wrap unpacking code around this compressed data.
When the program is executed, the unpacking code unpacks the compressed data into memory.
It then jumps to the OEP (original entry point) of the exe, in memory, and the program runs as normal.
The benefits of packing are obviously that the size of it is usually significantly less.
But more commonly, packers are used as a form of anti-cracking.
Packed targets cannot be disassembled until they are unpacked.
Modern packers which concentrate on anticracking protection, often include antidebug measures, and encyrption, to attempt to prevent you tracing through the loader code.