Rationale for Passing Students "by Compensation"
Compensation is used in (at least) some universities in the UK, too. The rationale is usually that although module learning objectives are not fully met, the program learning objectives are not sufficiently compromised, when only one module is failed with a near-pass mark. The meta-rationale is that we effectively choose between two "bad" things:


progressing or graduating a student who did not fully met the LOs
delaying progression / graduation for a year and asking student to repeat the module and/or resit the assessment


The first option feels like a lesser "worse" all things considered: student has a chance of picking the necessary knowledge later in other modules / programs, but they never have a chance to get a year of life back.