We have computed a state-of-the-art benchmark potential energy surface (PES) for the archetypal oxidative addition of the ethane C-C bond to the palladium atom and have used this to evaluate the performance of 24 popular density functionals, covering LDA, GGA, meta-GGA, and hybrid density functionals, for describing this reaction. The ab initio benchmark is obtained by exploring the PES using a hierarchical series of ab initia methods [HF, MP2, CCSD, CCSD(T)] in combination with a hierarchical series of five Gaussian-type basis sets, up to g polarization. Relativistic effects are taken into account either through a relativistic effective core potential for palladium or through a full four-component all-electron approach. Our best estimate of kinetic and thermodynamic parameters is -10.8 (-11.3) kcal/mol for the formation of the reactant complex, 19.4 (17.1) kcal/mol for the activation energy relative to the separate reactants, and -4.5 (-6.8) kcal/mol for the reaction energy (zero-point vibrational energy-corrected values in parentheses). Our work highlights the importance of sufficient higher angular momentum polarization functions for correctly describing metal-d-electron correlation. Best overall agreement with our ab initio benchmark is obtained by functionals from all three categories, GGA, meta-GGA, and hybrid DFT, with mean absolute errors of 1.5 to 2.5 kcal/mol and errors in activation energies ranging from -0.2 to -3.2 kcal/mol. Interestingly, the well-known BLYP functional compares very reasonably with a slight underestimation of the overall barrier by -0.9 kcal/mol. For comparison, with B3LYP we arrive at an overestimation of the overall barrier by 5.8 kcal/mol. On the other hand, B3LYP performs excellently for the central barrier (i.e., relative to the reactant complex) which it underestimates by only -0.1 kcal/mol. © 2005 Wiley Periodicals, Inc.