The cutter location compensation method is often used for unequal diameter machining of globoidal cam surface. A new calculation method for the normal error is developed, and a self-adaptive cutter location compensation optimization algorithm is proposed, whose objective is to minimize the maximal normal error. This algorithm can find out the best compensation direction and value by the cutter location optimization for any cam rotation angle and make the cutter location self-adaptive and flexible compensation according to the machining error. The normal error calculation formula has been proved to be valid by an example. A conclusion has been drawn that the radius difference between the cutter and the roller is the best compensation value and the best compensation direction is not fixed. The results show that the correctness and effectiveness of the improved self-adaptive compensation method have been proved and machining errors can be evidently reduced. 