How does the d’Hondt method allocate legislative seats?

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Map of Canada displaying the results of the 2008 federal election by province and territory, with regions shaded to indicate the leading party's share of the popular vote: blue for Conservative, red for Liberal, light blue for Bloc Quebecois, and orange for New Democratic Party. Each area is labeled with the number of seats won by each party, and a legend at the bottom summarizes national seat totals for each party. — election Canada's 2008 federal election results.

The d’Hondt method is a largest-average formula used in party-list proportional representation to allocate legislative seats. Under this system, seats are awarded sequentially to the party with the highest average number of votes.1

The calculation works as follows:

Initial Allocation: The first seat is awarded to the party with the highest total number of votes.1
Subsequent Rounds: For each party, the number of votes received is divided by the number of seats it has already been awarded plus one. Specifically, the formula uses the divisor $s + 1$ , where $s$ is the number of seats currently held by the party.1
Outcome: Each time a party wins a seat, its divisor increases, which reduces its average and its likelihood of winning the next seat.1

Because of this mathematical structure, the d’Hondt method has a slight tendency to favor larger parties while making it more difficult for smaller parties to gain legislative representation.1