Compasses were added in Seecret Friday Update 9 on September 10th, 2010. They are created by using one Redstone and four Iron Ingots (see formation below). The compass needle points towards your spawn-point at all times, even in your inventory screen, chests, lying on the floor or while holding it in your hand. When the compass needle is pointing straight "up" relative to the player, the player's spawn point is straight forward. Very specifically, your spawn point is the center of the block you spawn on, while the compass points to it's north-east corner.
The compass crafting recipe is as follows: