This study was conducted with the aim of diagnosing the compensation system for employees in Iran’s public sector. The research strategy is qualitative, based on an exploratory thematic analysis approach. The statistical population includes academic experts, experienced professionals, and managers or policymakers involved in the formulation, implementation, or oversight of compensation processes in executive bodies. Sampling was carried out using purposive and snowball methods, and theoretical saturation was achieved after 15 in-depth interviews. Data were collected through semi-structured interviews and analyzed using the six-phase thematic analysis framework with the assistance of MAXQDA 2020 software. The findings revealed that the challenges of the compensation system in Iran’s public sector can be categorized into four overarching themes, 14 organizing themes, and 51 basic themes.The results indicate that structural, behavioral, legal, and contextual deficiencies are the major barriers undermining the effectiveness of the compensation system. Addressing these issues requires comprehensive policy reform, process redesign, and stronger oversight and transparency mechanisms.