Objective/Meaning  Choosing a suitable compensation method is an important part of improving the ecological compensation mechanism of river basins, and it is also an effective means for the ecological protection and management of river basins in China.

  Methods/Procedures  Based on the DFID sustainable livelihood analysis framework, the structural equation model was built to analyze the implementation effect of the ecological compensation policy on the development of farmers’ livelihood in the headstream areas of the Tarim River Basin, so as to improves the ecological compensation method and the ecological compensation mechanism.

  Results/Conclusions  The results showed that there was a partial mediation between the ecological compensation policy and the sustainable livelihood of farmers’ livelihood capital. Among them, the increment of human capital (0.326) was the most obvious, followed by the natural capital (0.119), and the material capital (0.003) was the least. However, it would not affect the sustainable livelihood of farmers through the social capital and financial capital. Therefore, when implementing the existing ecological compensation policies, the diversified compensation methods should be implemented, focusing on the supporting measures related to improving the skills and cultural level of farmers, creating the ecological supporting jobs, and ensuring the health of residents, as well as providing the subsidies in the form of agricultural supplies and water-saving facilities.