It can be installed anywhere.
If you wish to install somewhere besides c:\bsp, you will need to edit the following files:
bsp\pball2\game.ini
bsp\quake2\pball\compilers\rad.bat
I just didn't feel like makind an installer for it to create the proper config files. Maybe I should.
As for the initial error, make sure you have the following files:
C:\bsp\Quake2\pball\compilers\qbsp.bat
C:\bsp\Quake2\pball\compilers\runmap.bat
And open up runmap.bat to make sure it reflects the proper location of paintball2.