The 40-year-old former Scotland international joined the Sky Blues in March 2013 following a three-year spell with Falkirk.
Meanwhile, assistant manager Neil MacFarlane has also penned a four-year contract extension at the Ricoh Arena.
"We are absolutely delighted that Steven and Neil have agreed new deals with the club," chief executive Steve Waggott told Coventry's official website.
"In Steven, we have a manager whose long-term vision absolutely mirrors that of the football club. We want to achieve success on the pitch and, integral to that, is identifying and developing the very best talent around.
"He has, quite rightly, become extremely popular with our supporters since taking over as manager. He has faced adversity head on and, considering the circumstances, did a wonderful job in keeping the club in League One last season."
Coventry recently return to the Ricoh Arena after being forced to play their home matches at Northampton Town's Sixfields Stadium.