For you, "The compass will lead you to a great treasure," was a specific semantic clue to the trap that is the curse. From the players' point of view, it's simply a description of the compasses function. How are the players supposed to realize that the compass itself is the "great treasure"? After all, from the standpoint of an adventurer, a compass that only leads to itself is next to useless.
Well, I got that idea from the players, actually. I had considered the idea that the PCs might sell the compass, and had a value based on normal (3.5) guidelines for the worth of such an item, including the fact that it was cursed. But the players pointed out that there had to be a crew ruthless or greedy enough that a (say) 2 in 30 chance of dying was worth doubling their money (or 3 in 30 for triple, etc.). I actually hadn't really considered that a "crew" was liable to include a lot more bodies than the party! I agreed that the compass ought to be worth as much as any treasure it would lead them to (because I knew that it might come back to bite them), and worked up a new value.
Now, at this point I would have liked to have had a good way to let the players know that their plan was not foolproof. But just coming out and saying it seemed wrong - it would almost certainly have led to play stopping until they could find and plug the loophole, and if they hadn't gotten it right I would have felt compelled to tell them that, no, it still might not work, because otherwise I would have been lying by omission, IMO. I dunno, maybe I could have said something like: "Just so you know, out-of-character, your plan might not be as foolproof as you seem to think - but that's all I'm going to say on the matter and you're on your own from this point on." Dunno, that still seems kind of lame.
But in the end, the point is that is doesn't really matter whether or not you think their plan is clever. That they think it's clever is enough.
It's not really your job circumvent the players' plan based on its cleverness. It's up to you to decide how difficult it should be for that plan to succeed (there should always be at least some minimal chance to succeed, no matter how difficult or dangerous that chance is), what the logical (and sometimes devious) consequences of success or failure are, and to perhaps give some mildly obvious hints of the possible dangers and consequences (if it seems reasonable that the PCs could figure such things out for themselves).
There was a great chance for their plan to succeed - I really couldn't come up with any contrivance that would lead to a situation where I could foil it. But luck and just a tiny bit of overconfidence on the players' part led me there anyway. There was no way I could have led the PCs to split up, or to end up in the cavern with no light source on my own. But significant parts of those circumstances did come from the players doing well...
If they had fought the mad sea-witch instead of making a clever guess and trying to parley, there wouldn't even have been a compass, as it was a detail I added when they asked what the pirates they where hunting where doing on the island. And if they hadn't all but massacred the pirate leaders (and only the leaders) before they even had a chance to act, the rest of the pirates wouldn't have run screaming deeper into the caves - and even then the party could have stopped to loot the bodies, retrieve their packs and baggage, etc.
Letting the PCs get the compass under those circumstances seemed to me completely arbitrary. It seemed to short-circuit the game's internal consistency, and would have ruined my fun, at least in the short-term. I should have let them get it, anyway. I've thought about the possibility of cheating and just not letting them find it ("Oh, one of the pirates you killed knew where it is, but otherwise tough luck.") but that wouldn't really have been more fun for me, and the players would have thought it was lame, I'm sure. And there was the possibility of rewinding things to before the fighter grabbed the compass, but that didn't even come up - everyone would have thought it was lame, so why bother.
I think the only good out would have been to have let them get the compass and just not even mentioned that they maybe shouldn't have. Letting them have it and pointing out that I could have screwed them wouldn't have been fun for anyone, IMO. But I seriously thought that once the players figured out what exactly had happened it would have seemed as reasonable to them as it did to me. (And I didn't actually expect any of the PCs to die before the players realized they they where under the curse, because the caves themselves really shouldn't have been that dangerous, IMO.)
I'm confused. Is the compass itself the only "fabulous treasure" it would lead people to?
See above. The compass worked as advertised, and the players where aware that it was worth as much as any treasure it could lead to because they came up with the idea, and I replied that "Well, then I guess the compass is a pretty fabulous treasure itself then, huh?"
I knew they didn't get that clue. If they had they would have stopped and figured out exactly what it meant, if they could get around it anyway, and how. I had a week to think on all this, and I decided that a) they would probably get the compass without invoking the curse because, really, they're adventurers. Half their job is finding treasure and they weren't likely to be in a situation where they wouldn't be able to find it without it's help. And b) if they did actually find themselves in that situation I didn't want to go easy on them because that would mean that the only reason that they had won was because I had made them win.
Now, I was the DM - I could have totally changed things around and decided that the compass simply wasn't capable of leading them to itself. I could have actually have dealt with that - making those kinds of decisions is part of my job when I DM, IMO. But I felt like I had dropped too many hints, and I really didn't want to end up with the players figuring it out and realizing that they only won because I made them win, that they basically never had a real chance to affect the course of the game. I played in an LFG game a while ago where, after refusing to let us run away and basically forcing us into the final encounter we fought several monsters that took 40+ hp to get bloodied, and then just dropped on the next piddly hit. We won, but it wasn't actually fun, in fact it kind of sucked.
So I had every expectation that the PCs would end up searching the caves in a methodical fashion, and I wasn't even going to play it all out and try to bore them into quitting. They would have just flat out found the compass, sold it off with minimal complications (I foresaw an attempted double-cross that was completely unlikely to succeed), and never had to worry about it again.
This thing was serious
bad news for the crew of a sea-going vessel, but anyone greedy enough to grab for it wasn't likely to realize that until it was too late. The ship would hit a storm after they recovered the first treasure, and the crew would have been trying to outrun it or sail through it at some pretty hefty penalties. Sure, those penalties would have ended as soon as the first crewmember drowned, but chances where they where pretty much gonners by that point anyway...