An instruction set where a field (a bit or group of bits) of the instruction word is decoded (either by hard-wired logic or microcode) to generate signals to control the functional units, as opposed to horizontal encoding where the instruction word bits are used as the control signals directly.
With vertical encoding, which combinations of signals and operations are possible is dictated by the decoding logic; the instruction field can only select one of these preprogrammed combinations. This has the advantage that many control signals can be generated based on only a few instruction word bits and only valid combinations of control signals can be generated, e.g. only one source driving a bus at once. An instruction set may use a mixture of horizontal and vertical encoding within each instruction.