Essendon have also appointed former Adelaide coach Neil Craig as their head of coaching, development and strategy and upgraded Simon Goodwin to senior assistant.
Craig's appointment is for two years.
Thompson coached Geelong to premierships in 2007 and 2009, but quit the Cats at the end of 2010 and took up a job as Hird's senior assistant at Essendon.
He has previously said he didn't want to coach again and had expressed reluctance to take over the reins when Hird's suspension was handed down in August, citing a lack of hunger.
But he said on Thursday his passion to be a senior coach was back and he was not taking the job simply because the Bombers needed him.
"I wouldn't do it if it was just for the club," Thompson told reporters.
He said he had spoken to players and board members before agreeing to take the job.
"Clearly they wanted a coach that wasn't going to just sit idle, that was going to do a great job and give them the best opportunity to be the best they can be," he said.
"They did want to know whether I was committed or not.
"I've openly stated in the past that I didn't want to coach.
"Well, I think I really wanted to do it for nine months and that's what I'm going to do."