The Compass is a peice of equipment that shows the location of the player and ponts to a certain position in the world, depending on what map is selcted. It can be seen in the upper right corner of the map, where its needle will point in the general direction of the location given by the map. This is one of the three essentials of adventuring mentioned by Baggus .
The Compass is located on AngelOak Island. The Parrot mentions an old friend of his, Vinny , who runs a pawn shop there, and that there's a good chance it would have a compass. The pawn shop is about halfway up the huge tree. The door is on the left side. Inside the pawn shop Vinny does in fact have a compass, and will sell it to the player for 50 coins.