FPS Lag Compensation

Within a window (in Valve's case, one second) keep a log of either game states or a log of actions within that time. If an event is outside the window then drop it (too old) or queue it to process in the future (hypothetical amnesia machine.)

Check the client's clock to see when an event happened. Roll back the game states to that point in time and process the event.

Note that valve's compensation favors the lagger. No-compensation favors those with better connections.