Compassion meditation (CM) is a promising intervention for enhancing compassion, although its active ingredients and neurobiological mechanisms are not well-understood. To investigate these, we conducted a three-armed placebo-controlled randomized trial (N = 57) with longitudinal functional magnetic resonance imaging (fMRI). We compared a 4-week CM program delivered by smartphone application with (i) a placebo condition, presented to participants as the compassion-enhancing hormone oxytocin, and (ii) a condition designed to control for increased familiarity with suffering others, an element of CM which may promote compassion. At pre- and post-intervention, participants listened to compassion-eliciting narratives describing suffering others during fMRI. CM increased brain responses to suffering others in the medial orbitofrontal cortex (mOFC) relative to the familiarity condition, p < 0.05 family-wise error rate corrected. Among CM participants, individual differences in increased mOFC responses positively correlated with increased compassion-related feelings and attributions, r = 0.50, p = 0.04. Relative to placebo, the CM group exhibited a similar increase in mOFC activity at an uncorrected threshold of P < 0.001 and 10 contiguous voxels. We conclude that the mOFC, a region closely related to affiliative affect and motivation, is an important brain mechanism of CM. Effects of CM on mOFC function are not explained by familiarity effects and are partly explained by placebo effects.