Based on density functional theory calculations, we present mechanisms underlying the improvement in the catalytic performance of Pd-based alloys for oxygen hydrogenation to water. As a model case, we consider the Pd/Pd 3Co system where one or two Pd overlayers are located on top of the bimetallic substrate. Our calculations clearly demonstrate that the subsurface Co atoms assist in facilitating the oxygen reduction reaction by lowering the activation barriers for O/OH hydrogenation with a slight increase in the O 2 scission barrier; however, we also find that the Co atoms lying below the subsurface have no significant contribution in altering the surface reactivity towards oxygen hydrogenation. The analysis of intra- and interlayer orbital interactions in the near-surface region elucidates the synergetic interplay between the surface electronic structure modification due to the underlying Co atoms (interlayer ligand effect) and the compressive strain caused by the Pd3Co substrate. This result also brings to light the significant contribution of the out of plane (dxz and dyz) states in altering the surface reactivity towards O hydrogenation.