Essendon confirmed at a media conference on Wednesday afternoon that the two-time Geelong premiership coach will be back at the club where he was a premiership captain and played 202 matches.
Thompson appeared unannounced at the Bombers' training session on Wednesday morning and told Hird and the players that he was joining the coaching panel.
He will begin work on an as-yet to be determined date in December, with the finer points of his role and the length of his commitment to be thrashed out in the coming days.
Football manager Paul Hamilton expressed his surprise at the timing and manner of Thompson's decision to join the club, but said the players were "very excited" at the news of his return to Windy Hill.
"From Essendon's point of view this is a fantastic outcome. It's a fantastic outcome for James, for the football department and for our team," Hamilton said.
"For Mark it's a chance to come home to a club where he was a premiership captain and played in three premiership teams. It's a great moment.
"We are really delighted and excited by his decision today and we look forward to him joining us."
The appointment completes a total revamp of Essendon's coaching lineup, with former Geelong assistant Brendan McCartney, Dean Wallis, Sean Wellman and Simon Goodwin joining Hird's group.
Thompson quit the Cats after the 2010 season, in which Geelong lost to eventual premiers Collingwood in a preliminary final, citing burnout.
Hamilton would not be drawn on the specific timing of his club's approach to Thompson other than to say that had been in discussion with him "for some time".
"It's been about 'what can we do for the Essendon Football Club to put the best-possible team forward?' We can't comment on the individual processes there," he said.
Neither Hird nor Thompson fronted the press on Wednesday, with the senior coach departing on an interstate recruiting trip and his new lieutenant continuing his sabbatical from football.
"We respect that," Hamilton said. "We want him to go away, take that break and when he comes back we want him to be able to give that great contribution that we know he will make to the Essendon Football Club."
Under Thompson, the Cats won the 2007 and 2009 flags and lost the 2008 grand final to Hawthorn.
Hamilton made no apologies for his club's clinical targeting of Thompson when asked if he expected to face a backlash from neutral AFL supporters. As for Thompson's former club, Hamilton said there was no ill feeling between the parties.
"We've had contact today with the senior members of the Geelong Football Club and, in all honesty, they've wished us all the best," he said.
Thompson's appointment at Essendon will see him return to the club he captained to the 1993 flag in his second year as skipper.
He started at the Bombers in 1983 and played for the club for 14 years. He won the Crichton Medal, Essendon's best and fairest, in 1987 and 1990, and played one game for Victoria.
In addition to captaining the side to the 1993 flag, Thompson played in the 1984 and 1985 premierships.
After finishing his playing days at Windy Hill he moved into an assistant coach role under long-time coach Kevin Sheedy in 1997, then in 1999 went to North Melbourne to work under Denis Pagan.
In 2000 he moved to the top job at Geelong, and barely survived a club review after the 2006 season, but within the year had the club winning its first flag in 44 years, and by a record 119-point margin over Port Adelaide.
