Consider these two examples. The first as used in the manual, and  the second a slight variation of it.

Example #1

<?php
$city  = "San Francisco";
$state = "CA";
$event = "SIGGRAPH";

$location_vars = array("city", "state");

$result = compact("event", $location_vars);
print_r($result);
?>

Example #1 above  will output:

Array
(
    [event] => SIGGRAPH
    [city] => San Francisco
    [state] => CA
)

Example #2

<?php
$city  = "San Francisco";
$state = "CA";
$event = "SIGGRAPH";

$location_vars = array("city", "state");

$result = compact("event", "location_vars");
print_r($result);
?>

Example #2 above will output:

Array
(
    [event] => SIGGRAPH

    [location_vars] => Array
        (
            [0] => city
            [1] => state
        )

)

In the first example, the value of the variable $location_values (which is an array containing city, and state) is passed to compact().

In the second example, the name of the variable $location_vars  (i.e  without the '$' sign) is passed to compact() as a string. I hope this further clarifies the points made in the manual?