Abstract: Recent findings have linked low hysteresis in shape memory alloys with phase compatibility between austenite and martensite. To investigate the evolution of microstructure as phase compatibility increases and hysteresis is reduced, transmission electron microscopy was used to study the alloy system Ti50Ni50xPdx, where the composition is systemically tuned to approach perfect compatibility. Changes in morphology, twinning density and twinning modes are reported, along with special microstructures occurring when compatibility is achieved. In addition, the interface between austenite and a single variant of martensite was studied by high-resolution and conventional electron microscopy. The low energy configuration of the interface detailed in this article suggests that it plays an important role in the lowering of hysteresis compared to classical habit plane interfaces.