Strange. I wouldn't go looking into server.xml. Instead, I would look at C:\coldFusion2016\cfusion\bin\cfcompile.bat. There is a possible workaround.
Open the cfcompile.bat file in a text editor. Copy all its contents into a new file, which you then save, as MYcfcompile.bat, in the same directory.
Now, locate in MYcfcompile.bat the code the following code excerpt:
:sourceless_deploy
set webroot=%~f2
set srcdir=%~f3
set deploydir=%~f4
Modify this excerpt to
:sourceless_deploy
set webroot=C:\ColdFusion2016\cfusion\wwwroot
set srcdir=C:\ColdFusion2016\cfusion\wwwroot\cfcompilein
set deploydir=D:\website\cfcompileout
Then run (in DOS):
MYcfcompile -deploy C:\ColdFusion2016\cfusion\wwwroot C:\ColdFusion2016\cfusion\wwwroot\cfcompilein D:\website\cfcompileout
Found the problem. It turns out that the dash in front of -deploy was a long dash not a normal dash. I think I picked up when copying the command line from a web page. So of course the test for "%arg1%"=="-deploy" would always fail. Your suggestion to edit the batch file put me on the right track.
Many thanks for your help.
Bob