I dropped an egg in a shoe box full of sand and it worked fine. Unfortunately, that design wasn't allowed at my school.

Water doesn't compress as far as I know, so it would be like the egg hitting concrete...

water also distributes pressure uniformly, so it will be like trying to crush the egg pressing all the surface points of it with the same force. Which is not easy to do.

I once did the egg drop with a plastic container of honey. The container shattered and got honey everywhere, but the egg survived.

We should do this for egg drops on the moon. One time containers filled with honey.

So it is a good idea?

It's still a fluid though, so applying a force doesn't necessarily compress it. Think about dropping an egg into water.

I wonder if you could convert all the deceleration into compression using water though.

Same principle - putting egg in a plastic jar of peanut butter works too. Provided the plastic jar is lightly padded. It takes a lot less padding to project the plastic jar than a naked egg and the viscosity of the peanut butter means that the egg won't drift from the center of jar.