The 59-year-old steered the east London side to 13th place in their second season back in the top flight, but came in for criticism from fans for the manner in which the team played.
The team was booed by supporters after a 2-1 league win over Hull City in March, having failed to dominate the opposition despite playing against ten men for over an hour.
They also faced jeers after defeat by West Bromwich Albion the following month, with Allardyce's supposed long ball tactics failing to satisfy those craving more eye-catching methods at a club once noted for its enterprising style.
"We have a very clear vision of how we want West Ham United to operate under our joint ownership," joint-chairmen David Sullivan and David Gold said in a statement on the club website, following lengthy talks with Allardyce.
"Although not everybody understands the West Ham way, we do and we respect it as we have been supporters all our lives. We believe this is about a philosophy that is not just about the style of play, but the whole ethos that surrounds the club.
"Sam was asked to give us a detailed presentation on his vision for next season and during this he assured us that he can deliver that ethos to West Ham United and we have agreed to support him with the resources that he needs."
The club will hire a new attacking coach and overhaul the scouting and recruitment operation. Funds will be available for investment in the squad.
Allardyce joined West Ham in June 2011 and guided them to promotion from the second-tier Championship before securing a 10th-place finish in the Premier League the next season.
They were hampered this season by a number of injuries, including a lengthy layoff to record signing Andy Carroll, and were in the relegation zone around the turn of the year.
They ultimately pulled away from the drop zone and Sullivan and Gold said they had to balance ensuring their Premier League survival with entertainment on the pitch ahead of a move to London's Olympic Stadium in 2016.
"I look forward to taking the club forward and improving the squad for next season to try and achieve the plans we have set out in our very productive meeting last week," former Bolton, Newcastle and Blackburn manager Allardyce said.
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