Compensatory picks are extra draft selections awarded to teams that lost more qualifying free agents than they signed the previous year. They are calculated by a league formula weighing contract value, playing time and honours, and they slot in at the end of rounds three to seven.
The purpose is to soften free agency for the clubs that develop players. A team that loses a starter it drafted and cannot afford to keep gets something back, and a team that spends heavily in free agency gives something up, which slows the drift of talent towards the richest rosters.
The formula is not published in full, which is part of why the awards are argued over each year. What is known is that it compares departures to arrivals, weights them by the size of the contracts and how much the player then played, and only counts free agents who left for market reasons rather than being released.
Clubs plan around it deliberately. A front office that expects to lose two well-paid free agents will sometimes avoid signing an equivalent player from another team, because doing so would cancel out the pick, and will wait until after the qualifying period to shop instead.