Hesson, 39, took over in mid-2012 with New Zealand in the doldrums after a poor run of defeats and soon created controversy by axing the popular Ross Taylor as captain in favour of Brendon McCullum.
However, his appointment has paid dividends, with the Black Caps winning their last three Test series against India at home and the West Indies at home and away.
New Zealand Cricket chief executive David White said Hesson's contract, which had been due to expire in April next year after the Cricket World Cup in Australia and New Zealand, had been extended to April 2017.
"His selections have also earned praise from some of the greats of the game."
Hesson, who coached provincial side Otago for six years and also had a stint in charge of the Kenya national team, said he was looking forward to taking New Zealand to the World Cup and beyond.
"It's a really exciting time for the sport with the World Cup at home, our senior players performing well, and a promising group of youngsters who are all fighting for World Cup spots," Hesson said.