Executable compressors work by compressing selected portions of executables. At runtime, compressed executables are decompressed and reconstructed directly into their virtual image (memory) so that no data is ever written to the disk. The executable can therefore be run exactly as it was before without the user even knowing it was compressed.

PECompact2 is a next generation win32 executable/module compressor. Commonly termed an 'executable packer', such utilities compress executables and modules (i.e. *.EXE, *.DLL, *.OCX, *.SCR). At runtime the compressed modules are rapidly decompressed in memory.

Why would one want to compress an executable/module?

There are many reasons. One of the most common is that compression offers an inherent degree of tamper resistance and obfuscation. Another is that since the usual compression ratio is greater than 70% (that is, the compressed file is 30% of the original), larger executables and modules may load much quicker from the network or disk hosting them.
Since storage medium is often the largest bottleneck in overall system performance, the time spent decompressing can be much less than the time saved by not having to load as much data from the storage medium.