— Block based motion compensation techniques are commonly used in video encoding to reduce the temporal redundancy of the signal. In these techniques, each block in a video frame is matched with another block in a previous frame. The match criteria normally used is the minimization of the sum of absolute differences (SAD). Traditional encoders take the difference of the current block and its best matching block, and this differential signal is used for further processing. Rather than directly encoding the difference between the two blocks, we propose that the difference between the current block and its first order linear estimate from the best matching block should be used. This choice of using linear compensated differential signal is motivated by observing frequent brightness and contrast changes in real videos. We show two important theoretical results: (1) The variance of the linear compensated differential signal is always less than or equal to the variance of differential sig...