Newbie goes nut trying a Compound Path

[handrawn]

if you just went to object/compound path/make - then you would get a 'hole' as you have only one fill area

if you select both your rectangle and circle and as suggested go to window/pathfinder and select 'divide,' and then go to object/compound path/make - you will get a compound object with two fill areas

bear in mind that although compound, as it is one path, the outlines can only be one colour [ditto fill areas for colour/gradient] AFAIK [in the sense that there is only one actual outline and one actual fill even though they are split into more than one area]

and I am using an older version of illy so things may be a little different in that respect..