The vestibular system is responsible for processing self‐motion, allowing normal subjects to discriminate the direction of rotational movements as slow as 1–2 deg s−1. After unilateral vestibular injury patients’ direction‐discrimination thresholds worsen to ∼20deg s−1, and despite some improvement thresholds remain substantially elevated following compensation. To date, however, the underlying neural mechanisms of this recovery have not been addressed. Here, we recorded from first‐order central neurons in the macaque monkey that provide vestibular information to higher brain areas for self‐motion perception. Immediately following unilateral labyrinthectomy, neuronal detection thresholds increased by more than two‐fold (from 14 to 30deg s−1). While thresholds showed slight improvement by week 3 (25deg s−1), they never recovered to control values – a trend mirroring the time course of perceptual thresholds in patients. We further discovered that changes in neuronal response variability paralleled changes in sensitivity for vestibular stimulation during compensation, thereby causing detection thresholds to remain elevated over time. However, we found that in a subset of neurons, the emergence of neck proprioceptive responses combined with residual vestibular modulation during head‐on‐body motion led to better neuronal detection thresholds. Taken together, our results emphasize that increases in response variability to vestibular inputs ultimately constrain neural thresholds and provide evidence that sensory substitution with extravestibular (i.e. proprioceptive) inputs at the first central stage of vestibular processing provides a neural substrate for improvements in self‐motion perception following vestibular loss. Thus, our results provide a neural correlate for the patient benefits provided by rehabilitative strategies that take advantage of the convergence of these multisensory cues. This article is protected by copyright. All rights reserved