The lake's name is derived from Chief John Compound, a Mattatuck-Tunxis Native American. On December 3, 1684, his tribe signed a deed that left Compound's Lake to a group of white settlers, including John Norton, who had migrated to central Connecticut from Massachusetts. The property was left to the settlers in exchange for a small amount of money and miscellaneous items, including a large brass tea kettle.

The park's history goes back to 1846, when Gad Norton hired a scientist to perform an experiment using explosives, which failed. The experiment brought large crowds, which inspired Norton to open an amusement park. His park had public swimming and rowing on the lake, a gazebo for lakeside band concerts, and several rides. The park saw success as a picnic park through the post-American Civil War era.

In 1851, a California Gold Rush 49er named Isaac Pierce joined Norton to establish a firm. The two men petitioned local legislators and asked that their residences be ceded from the town of Southington to the town of Bristol. In 1895, a casino was built on the property, which was the first permanent building at the site. Later that year, the Bristol and Plainville Tramway Company constructed the Southington and Compounce trolley line. Shortly after, Lake Compounce purchased the Lake Compounce Carousel for $10,000. The Carousel is included in the National Register of Historic Places.

In 1914, Lake Compounce opened Green Dragon, the park's first electric-powered roller coaster. The coaster was torn down in 1927 to make room for Wildcat, a wooden coaster designed by Herbert Schmeck and built by the Philadelphia Toboggan Company.

The early 1930s brought more growth to the park. The casino was expanded with the addition of a dance floor. An all-time attendance record of 5,000 people was set in the spring of 1941, when Tommy Dorsey's reorganized band featured Frank Sinatra, who had yet to reach the height of his career.

The effects of the Great Depression and the growing usage of the automobile brought trolleys in the United States into a decline, which negatively impacted attendance at Lake Compounce. These same factors had similar effects on other parks in the New England region, such as Canobie Lake Park and Riverside Park. In 1944, Lake Compounce opened a steam railroad. It was designed and built by Connecticut actor William Gillette, the original actor of Sherlock Holmes in silent films.

The park's success was stable until the late 1960s, when attendance began to decline. Lake Compounce remained under the ownership of the Pierce and Norton Corporation until 1966, when Edward G. Pierce sold his share to the Norton family. The Nortons owned and operated the park through 1985 and were able to restore some profitability and raise attendance. No major attractions were added during this time, and the Nortons listed the park for sale in 1984. In 1985, Lake Compounce was sold to the Hershey Entertainment and Resorts Company, owners of Hersheypark in Hershey, Pennsylvania, who briefly renamed the park to "Hershey's Lake Compounce". Factors such as poor marketing, low attendance, and repeated ride outages caused Hershey to sell the park after two seasons in 1987, a decision that upset local representatives.

In the spring of 1987, Joseph Entertainment Group (JEG), owned by Joseph Balestieri, bought the park and renamed it "Lake Compounce Festival Park". The park received renovations, and in 1988 a 20,000-seat outdoor amphitheater was added. One of the first notable musical acts to perform at the new venue was the group Milli Vanilli, and their live performance was broadcast on MTV in what was later recognized as the first public sign that they were lip-syncing. JEG focused more of their attention on concert promotion and neglected the amusement park portion of the property. The Wildcat roller coaster and other rides were nonoperational by 1991. That year, JEG's financial troubles were exposed when a check the company wrote to Guns N' Roses bounced, and the performance was cancelled. It was later discovered that JEG was nearly $900,000 behind in taxes and had not refunded nearly $300,000 to ticket-holders for 15 cancelled concerts.

At the end of the 1991 season, Joseph Entertainment Group filed Chapter 11 bankruptcy and did not open the park for the 1992 season. The park was put up for sale at a very low price. After being unable to find a buyer, JEG filed for Chapter 7 bankruptcy protection and liquidated the park. The land and what was left of the rides and buildings were sold to Stephen Barberino. The park remained closed for the 1992 and 1993 seasons. In 1993, Funtime Parks, owner of Geauga Lake Park and Darien Lake Park, among other parks, became Barberino's management partner. The existing rides were repaired, several new rides were added, and waterslides were constructed on the beach and lake areas. The park reopened for the 1994 season. That year, Funtime merged with Premier Parks, which later became Six Flags. Premier Parks and Barberino then put Lake Compounce up for sale again in 1995. Companies including Cedar Fair, Alpha Smartparks, and the Kennywood Entertainment Company made offers.

Early in 1996, Kennywood Entertainment Company, owners of Pittsburgh's Kennywood amusement park, signed an agreement to purchase Lake Compounce. That year the park added several new rides and a Boomerang roller coaster. The park prospered as a family amusement park, rather than a thrill park. In 2000, the roller coaster Boulder Dash was opened, and later received the 2004 Golden Ticket Award for the #1 Wood Roller Coaster from Amusement Today. In late 2007, Kennywood Entertainment Company sold its parks to the Spain-based Parques Reunidos company.

More recent plans have included a significant expansion of the Crocodile Cove water park. This has required the moving of nearby Mount Vernon Road to the north to allow the park more room for expansion. The road move was expected to cost $6 million, while the additions to the water park were expected to cost $15 million. In 2013, the park added the Bayou Bay wave pool. In 2014, the park added an off-site campground called Bear Creek Campground with cabins, tent and RV spaces, and a main lodge. The campground was renamed to Lake Compounce Campground in 2021 during park's 175th season.

In 2016, the park added a new roller coaster called Phobia Phear Coaster, a Sky Rocket II model from Premier Rides. Phobia Phear Coaster features three linear synchronous motor (LSM) launches and a heartline roll at 150 feet (46 m) high. General Manager Jerry Brick stated that the coaster was the biggest investment in the park's history.

In early July 2017, Lake Compounce shut down Sky Ride — a twenty-five minute round trip chairlift from the park up to the top of the Southington Mountain ridge. The non-ski chairlift was one of the rides brought to the park by Kennywood Entertainment in 1997. The decommissioning came after a chairlift accident at Six Flags Great Escape on June 24, 2017. The remote and inaccessible nature of the lift's path and terminus on top of Southington Mountain were cited by Brick as reasons for the closing.

Both the bumper cars and the trolley ride were removed for the 2024 season.

On March 18, 2025, it was announced that Lake Compounce had been purchased by Herschend Family Entertainment.