Like the override and merge directories, files inside the compile directory are relative to the World of Goo installation directory.
The compile directory directory contains XML files which are compiled (encrypted) into bin format. This allows GooTool to compile the file for you, so you don't have to distribute different versions of your addin for Mac and PC.
Files ending in .xml are automatically compiled to the same filename but with a .bin extension instead. For example, your addin file /compile/res/levels/MyLevel/MyLevel.level.xml is compiled to <WorldOfGoo dir>/res/levels/MyLevel/MyLevel.level.bin.
Future
Once the .binltl format is figured out (if that turns out to be useful - it's only used for animations which seem to be programmatically triggered), another file extension will identify files to be compiled to .binltl format.