Local lad Hughes gets due reward from Smith.
Smith was concerned that Hughes, having joined his favourite club from non-League football, might be stranded at the lower end of The Hawthorns pay scale.
"I was a local lad mysel and you tend to get left behind at times," said the Albion boss, who spent most of his playing career at Stoke City.
"If people do the job, it's only right that they are rewarded. I thought Lee deserved an improved contract because he has done so well.''
Hughes, who joined Albion from Kidderminster Harriers for an initial pounds 200,000 last summer, ended his debut campaign at The Hawthorns as joint top scorer with 14 goals, even though he did not start a match until Smith's arrival in December.
Even so, the 21-year-old marksman has no complaints about former manager Ray Harford, the man who gave him his break in League football. "I think Ray Harford did me a favour by taking me along gently when I signed," he said.
"But I'm more than grateful that Denis kept me in the team for the second half of the season."
While Hughes has secured his long-term future, Wolverhampton Wanderers striker Don Goodman faces an anxious spell waiting to see if manager Mark McGhee intends to keep him at Molineux.
Having originally told Goodman he would be released, McGhee is now contemplating offering the former Albion and Sunderland player a new contract.
In the meantime, though, Goodman is free to consider other options, and has been made a lucrative offer by Japasense club Hiroshima. He would, however, prefer to carry on playing in this country.
Birmingham City defender Darren Purse has been named in the England squad for the Toulon Under-21 tournament which gets under way next Thursday.
The 24-man party heading for France also includes Aston Villa midfielder Lee Hendrie.