The hydrogenation of CO on Pd can lead to methane via the Fischer–Tropsch process and methanol via oxygenate synthesis. Despite the fact that the former is thermodynamically favored, the catalysis is mostly selective to the latter. Given the importance of methanol synthesis in both industry applications and fundamental understanding of heterogeneous catalysis, it is highly desirable to understand the mechanism and selectivity of CO hydrogenation on Pd catalysts. In this work, this process is studied on Pd(111) using periodic plane-wave density functional theory and kinetic Monte Carlo simulations. The barriers and reaction energies for the methanol and methane formation are systematically explored. Our results suggest that methanol is formed via CO* → CHO* → HCOH* → CH2OH* → CH3OH*. The HCOH* and CH2OH* intermediates, which feature a C–O single bond, were found to possess the lowest barriers for C–O bond fission, but they are still higher than those in methanol formation, thus confirming the kinetic origin of the experimentally observed selectivity of the Pd catalysts toward methanol.