I suspect it says something like you may choose time off (vacation time) in lieu of (instead of) overtime pay. I probably shouldn't say this, though, because wild guesses based on invented context are really not appropriate here.
Time off in lieu of compensation would mean a free day or some free hours instead of extra money.
For instance, if I lead a company function on a Saturday (when I do not usually work), I cannot get paid extra for doing it. But maybe I can stay home on Monday instead. That's time off in lieu of compensation.
This is a common phrase in UK public sector employment.
It is not unusual for people to work outside normal hours and then to take time off instead of (in lieu of) claiming overtime payment. Frequently abbreviated to TOIL on leave-sheets.