Technological advances as well as novel manufacturing and design paradigms, such as industry 4.0 and digitalization, offer new opportunities for innovative products. However, they also increase the product complexity and cause new challenges in the production process. Therefore, agile production approaches are crucial. Tolerance compensation provides more flexibility in the production process, as demands on dimensional accuracy of the components are reduced. As a result, tolerance compensation also offers the possibility of reducing production costs without compromising product quality. Nevertheless, tolerance compensation is often considered a reactive intervention to reduce the number of out-of-spec parts a posteriori instead of including it in the early stages of Geometrical Variations Management. The contribution tackles this issue by characterizing and categorizing different methods of tolerance compensation as well as providing design guidelines for the application of tolerance compensation methods. This enables design engineers to select a suitable tolerance compensation method for different applications.