A compass shows the direction the player is currently facing. They can be found in residential areas, such as supermarkets, towns, and cities. Compasses do not use up a normal inventory slot, but instead go into a tool slot with your flashlight, matches, etc; they will however use one inventory slot when stored in a backpack. The compass is shown by holding "K", or by double-tapping "K" to toggle it.
If everyone in your group has a compass, you can use it to call out bearings to targets. "Bearing 185, two snipers" is an example of drawing attention to something that may otherwise be hard to spot for your teammates.