An　electromagnetic　rotary　encoder　(ERE)　is　a　kind　of　angular　sensors　using　magnetic　effects　to　measure　angular　positions.　It　is　widely　used　in　many　industrial　control　systems　because　it　has　many　advantageous　characteristics:　low　cost,　simple　structure,　work　in　a　harsh　environment,　and　high　reliability.　However,　the　output　signal　of　ERE　is　always　disturbed　by　magnetic　leakage　caused　by　the　inappropriate　installation　of　ERE.　To　address　this　problem,　the　paper　proposed　a　self-compensation　algorithm　for　induced　signal　which　contains　two　parts:　the　first　part　is　determining　the　angle　positions　apart　from　180　electrical-degree　each　other　by　constructing　the　ideal　output　signal　by　the　difference　between　the　sensor　output　signals　of　the　two　adjacent　positions,　and　establishing　the　equations　of　the　induced　voltage　at　both　positions　to　obtain　the　residual　signal　induced　by　the　electromotive　force　generated　by　the　leakage　flux.　The　second　part　is　employing　the　least　square　method　for　estimating　the　amplitude,　phase,　and　offset　of　the　residual　voltage.　In　order　to　verify　the　algorithm,　the　experiments　of　the　sensor　in　the　unbalanced　installation　situation　are　carried　out,　and　the　signal　compensation　algorithm　is　then　implemented　based　on　ERE　and　the　high　accuracy　optical　encoder.　The　experimental　results　show　that　the　unbalanced　installation　produces　a　systematic　error　of　the　rotation　angle　and　the　proposed　algorithm　can　effectively　reduce　the　systematic　errors.　©　2001-2012　IEEE.