Watson received a multiyear contract, the club announced Wednesday. He took over June 7, when the Earthquakes reached a mutual agreement with then-coach Frank Yallop to part ways.
The 43-year-old Watson led San Jose to an 11-5-3 record and the Earthquakes just missed the playoffs based on a tiebreaker after overcoming a disappointing start to the season.
The Earthquakes were 3-6-6 with 15 points and in second-to-last place in the Western Conference when he assumed coaching duties.
Watson had the best points-per-game average in the league after taking over at 1.89. He also led the club to the CONCACAF Champions League quarterfinals, and they will face Toluca (Mexico) next March.