In order to improve the measuring accuracy of a steel ring reflective grating, a grating signal compensation system is designed. The system is used to compensate the signal amplitude, DC voltage and the phase of the grating, respectively, for which two grating signals have a better orthogonality. First, according to the sampling method for steel ring reflective grating signals, an electronic processing system is created. And then several compensation algorithms are established aiming at the signal amplitude, DC voltage and the phase.By taking the steel ring reflective grating with 8 192 lp/mm as a platform and the results of testing precision as a basis of adjudication, the proposed signal compensation system is verified. The results show that the precision compensated has been improved by 2.28″ with an increasing magnitude of 50%.Obtained results prove that the signal compensation system is feasible.