The Backward Compatibility (Enrollment v1.0.1) menu was added for the compatibility of face template enrolled in firmware version 1.0.1 or older.

FaceStation 2 1.03 has an improved algorithm for face matching but it is incompatible with face templates enrolled with the 1.01 version. 

So if you already have face templates registered in 1.01 or older use the Backward Compatibility mode in the device Authentication menu.
This will allow the use of the new templates enrolled in versions 1.03 and above and also the old templates enrolled in 1.01.
If it is a new install and you are initially enrolling all users on 1.03 or above, turn off the compatibility feature for a small increase in authentication speed.