In a Fizeau interferometer using sinusoidal phase modulation technique, the variation of interference intensity with optical path difference (OPD) does not follow a rigorous cosine behaviour any more. This is because the presence of multi-reflection between the reference plate and the surface under test leads to multi-beam interferences. If the interference signal is processed according to double-beam interference theory, non-ignorable measurement error can be produced. In this paper, a sinusoidal phase modulation Fizeau interferometer used to measure micro-displacement with nanometer precision is established. The measurement error caused by multi-beam interference is analyzed in detail. Some parameters of the Fizeau interferometer are optimized and the measurement results are corrected using error compensation algorithm, so that the influence of multi-beam interference is reduced effectively.