Despite the bitter disappointment such a decision brought, Thompson admits that he ultimately benefitted from losing the burden of captaincy, and he expects Hyypia's playing career to experience a similar upsurge now that Steven Gerard has taken on the mantle of leader at the club.
"It was a difficult decision but I know better than most about a situation like this," revealed Thompson.
"When you're a proud person, which I know Sami is, it can be very difficult to take. But he was very professional in the manner he accepted it.
"I completely relate to the circumstances and told Sami what happened to me. Back in 1982 Bruce Grobbelaar had just arrived at the club and we went through a spell when things were extremely difficult.
"When I lost the captaincy we were 12th in the league and 18 points behind the leaders. We went on from there and won the title. My performance level went from five out of ten back to nearer ten. Losing the captaincy did make me respond and I'm sure it will be the same for Sami.
"You're not happy with it when it happens. Of course not. You have pride. But I know it was done at the right time by Bob Paisley and for the right reason which was to spur me into action. At the time I was upset. I certainly didn't thank him for it. You can imagine what the room was like when he told me.
"But as you get older you realise why and how it was done and the effect it had. Bob was a very clever manager. We don't always want to look back, but there is a parallel in how it was with me and how it is now with Sami. The biggest factor in all of this was helping Sami.
"We wanted to ease the burden on him. I think he showed in just the one game he's responding in the way we knew he would. One swallow doesn't make a summer, but you only have to look at his outstanding, centre-back performance on Wednesday. Don't get me wrong. There's not been any doom and gloom around Sami by any means.
"But I've spoken to him many, many times, as I do all our defenders, and I realised he needed to concentrate solely on trying to keep his game together. His biggest quality since he joined us has been his ability to maintain a high level of consistency.
"For a while we think he's needed to get that back. The boss and I chatted about it and although we know a lot of people talk about timing, we felt that for Sami to concentrate 100 per cent on his job this was the right decision.
"If you're a good professional and top player, as Sami is, you do respond in the right manner. We believe in him and what he can do. We are sure this will inspire him to reach that high, consistent level which he's produced so often."
Helping Finnish star Hyypia through an obviously difficult period is of the utmost importance to Thompson, but he still had words of praise for the latest recepient of the treasured armband, Steven Gerrard.
He said: "For Stevie it's an extremely proud moment to be captain of this football club. He's taken the armband before in certain games, but that's not the same as being club captain. I know it's special for him, especially as a Liverpool fan. He's not a stand-in now. He's earned the chance to do it in his own right.
"Great captains have different qualities. You can be an organiser and motivator and do things verbally. You can also be quieter and achieve results by inspirational performances.
"With Steven, I think we'll get a combination of both. That can make him a truly great captain. It was similar with Graeme Souness. He combined the two.
"There's also lot of responsibility that comes with captaincy. The profile has grown even more in terms of the media and sponsorship exposure."