The system was blamed for inappropriate presentation of candidates who, for example, might be entered for Higher knowing that a narrow fail would earn a top A grade at Intermediate 2.
The system to be introduced next year will have a level D for such students at Intermediate, Higher and Advanced Higher levels. A narrow fail is defined as up to 5 per cent below the pass mark.
The previous approach was widely seen as contributing to the high failure rate in Higher English - one in four candidates scored 30 per cent or less in this year's exam. By eliminating the bottom 25 per cent who would have been better off sitting Intermediate 2, the pass rate would have risen to 78 per cent instead of 59.2 per cent.
The SQA admitted the compensatory award had caused "some confusion".
Universities in particular were misled last year when some students gained entry on the basis of a compensatory A in their Highers when, in fact, they had failed their Advanced Higher.