In a previous paper we introduced the notion of synthesis abstraction, which allows efficient compositional synthesis of maximally permissive supervisors for large-scale systems of composed finite-state automata. In the current paper, observation equivalence is studied in relation to synthesis abstraction. It is shown that general observation equivalence is not useful for synthesis abstraction. Instead, we introduce additional conditions strengthening observation equivalence, so that it can be used with the compositional synthesis method. The paper concludes with an example showing the suitability of these relations to achieve substantial state reduction while computing a modular supervisor.