In this paper, an efficient inter-layer motion-compensation technique is proposed for enhancement layer in spatially scalable video coding. The proposed approach exploits the prediction residue correlation between consecutive spatial layers. In enhancement-layer motion compensation, it selects the method with the lowest rate-distortion (RD) cost from three schemes: pyramid motion compensation, subband motion compensation, and encoding the enhancement layer with no base-layer information. To reduce the block artifacts of the enhancement-layer prediction used in the subband method, extended edge prediction is introduced in the proposed approach. Compared with the current scalable H.264/AVC extension (SVC) motion-compensation scheme, our experimental results show that the proposed method exploits the redundancy between the base layer and the enhancement layer more efficiently and hence improves the coding performance. It achieves an improvement up to about 1 dB in the enhancement-layer encoding for different coding parameters and video sequences.