Supported Pd-Au bimetallic nanoparticles make up a promising class of catalysts used for hydrogenation and oxidation reactions. Recently, the role of dynamic restructuring of Pd regions at and near the nanoparticle surface in response to modulating gas (H₂ and O₂) concentrations was highlighted for controlling the surface Pd oxide stoichiometry. Here, we investigate the mechanism of formation and decomposition of Pd hydride (PdH_x) at and near the bimetallic nanoparticle surfaces, a key species for controlling the activity, selectivity, and stability of Pd catalysts in many hydrogenation reactions. We employ modulation excitation X-ray absorption spectroscopy (ME-XAS) to directly observe the time scale of PdH_x formation and decomposition on the surface of Pd-Au nanoparticles. Density functional theory (DFT) calculations provide additional insights into the stability and energetics of PdH_x formation under varying H fractions and Pd substructures. Our results reveal a complex interplay between Pd ensemble size, surface structure, and hydrogen environment in determining the kinetics and thermodynamics of PdH_x formation. By elucidating the mechanisms underlying surface PdH_x formation and decomposition, the rational design of dynamic catalysts with controlled Pd hydride stoichiometries can become possible.