Abstract: To reduce the distortion in the video coding, the two-step method for distortion compensation in video coding is proposed. Firstly, the DC offset of the reconstructed picture is compensated. Then, the adaptive compensation filter is designed for processing the picture to reduce further AC part of the distortion in the video coding. Experimental results demonstrate that the two-step distortion compensation outperforms the existing algorithm of adaptive loop filter with different resolution sequences. The coding efficiency is improved up to 26.31% compared with H.264/AVC. In addition, with the feature that the sum of the tap coeffients of the adaptive compensation filter equals 1, the modified algorithm for quantization and codec of the filter coefficients is proposed. The redundancy of the description of the filter coefficients is reduced.