The two-factor theory (also known as Herzberg's motivation-hygiene theory) states that there are certain factors in the workplace that cause job satisfaction, while a separate set of factors cause dissatisfaction. It was developed by psychologist Frederick Herzberg, who theorized that job satisfaction and job dissatisfaction act independently of each other.
According to Herzberg, individuals are not content with the satisfaction of lower-order needs at work or competency at simple tasks, for example, those associated with minimum salary levels or safe and pleasant working conditions. Rather, they look for the gratification of higher-level psychological needs having to do with achievement, recognition, responsibility, advancement, and the nature of the work itself. They would cast off the security of minimal responsibility for a shot at glory and a higher level of satisfaction and fulfillment. This theory is often tied to A.E. Maslow's Hierarchy of Needs which, when simplified for the purposes of this study, bottom out with such basic needs as breathing, food, water, and shelter, and top out with higher human desires such as morality, creativity, spontaneity, and problem solving. The theories are tied thusly: humans are motivated by higher pursuits. They will not stay content for long with work that can fulfill their base needs so easily.
The two factors that comprise Herzberg's theory are hygiene factors, the absolute bare minimum of requirements that will prevent employee dissatisfaction. They do not lead to higher levels of motivation, but without them there is dissatisfaction. Hygiene needs include working conditions, quality of supervision, salary, security, and interpersonal relations. Motivation factors, such as achievement, recognition, advancement, and growth on the job are needed in order to motivate an employee into higher performance.
The presence or absence of hygiene and motivation factors affect employees in different ways; that is, the presence of one does not automatically negate the absence of another. A high hygiene, high motivation situation is ideal; employees are highly motivated and have few complaints. High hygiene and low motivation sees employees with few complaints but not highly motivated. The job is perceived as "just a paycheck". Low hygiene with high motivation has highly motivated employees with a lot of complaints; a situation where the job is exciting and challenging but salaries and work conditions are lacking. Low hygiene and low motivation is obviously the worst case scenario. Employees are hardly motivated and have numerous complaints.
Herzberg's theory is critiqued by some because people will naturally take personal credit for satisfaction and blame dissatisfaction on external factors. While it is quite true that some people create their own misery in the workplace, the theory still holds water because it is hard to deny that an unfair boss, low wages, unsafe conditions, and boring tasks will lead to unhappy employees.
Sources:
http://www.netmba.com/mgmt/ob/motivation/herzberg/
http://www.valuebasedmanagement.net/methods_herzberg_two_factor_theory.html