OK I just now went back to check and OH. MY. GOD. You're right-- I completely misunderstood how it worked! I'm kind of embarrassed but hopefully the next person who reads this will get a laugh from my dumbass mistake lol
The compass in the game is wrong. The needle always points to the north, so if the needle spins then the whole dial must spin with it, and the front of the compass would indicate the correct direction. What you need to do when walking is ignore the dial, "remove" it from your mind, only focus on the needle and mentally create a dial which spins with the needle. Try this in Google maps or Streetview where the needle spins like here but there's no dial.
Here is a video demonstration of a magnetic compass. This is the type of physical compass I'm familliar with reading so it's what I chose to emulate for this game. The game shouldn't have the same ux as google maps because google maps is meant to be a convenient method of navigating in real life, whereas this is a horror game about navigating with less than modern tools.