AFAIK, they work just like in a non-composited desktop.

The problem with rendering the cursor into the primary plane is that, often, only the cursor changes, and you'd have to re-render the whole plane that contains the cursor. That is easily doable for modern hardware, but bad for power consumption and may also be higher latency. (The latency aspect gets interesting when dragging something on the primary plane - I think most compositors temporarily disable the hardware cursor in order to keep cursor and dragged object in sync.)