Under team policy, terms of the agreement were not disclosed.
Cheeks, a former coach of the Philadelphia 76ers and Portland Trail Blazers, replaces Lawrence Frank, who was fired after the Pistons finished with a 29-53 record.
"The leadership and player development qualities he brings as a former player and coach blends nicely with the roster we are building for the future," Pistons President of Basketball Operations Joe Dumars said.
"He's won an NBA championship, coached in two NBA Finals as an assistant coach and mentored some of the top young players in the NBA."
Cheeks served as head coach of the Trail Blazers from 2001-05 posting a 162-139 regular-season record. The 56-year-old became coach of the 76ers' in 2005 and went 122-147 in more than three seasons. Overall, he has a 284-286 coaching record in the NBA.
He has been an assistant with the Oklahoma City Thunder for the past four seasons.
A four-times NBA All Star, Cheeks played in the league for 15 years, 11 with Philadelphia, and was a key member of the 76ers' 1983 NBA championship winning team.
He averaged 11.1 points, 2.8 rebounds, 6.7 assists and 2.1 steals in 1,101 career games.