By default the Server Settings > Extended value (stored in /config/server.cnf) to find the compiler is
watt.server.compile=javac -classpath {0} -d {1} {2}
either put javac on your PATH before starting IS or, what I like, set the javac command to be a fully qualified path to the compiler you want run when you save a Java service.
#webMethods#webMethods-General#Integration-Server-and-ESB