Block-based motion compensation fails to maintain an acceptable level of prediction error which makes the transmission of this error impossible for very low bit-rate coding owing to the small bit allocation. The reason is that the motion model assumed in block-based techniques cannot approximate the motion in the real world precisely. To develop an effective motion compensation method for very low bit-rate video coding, we address the issue of adopting more sophisticated motion model than block-based. The motion model discussed here is based on the representation of optical flow in its principal components domain. The performance of motion compensation based on this model is compared with MPEG using the PSNR measure and qualitative experiments. Both of these criterias show a gain of compression in the order of 30%.