Our group eliminated the automatic multiple attacks at the -5 penalties. Instead, every character gets one attack per round (with certain weapons being excepted) unless they take a feat like those in Star Wars Saga Edition that allows multiple attacks. (We, also, increased the number of feats that characters get a bit...)
The exceptions were that we are testing an idea for weapon speed based on three categories. Fast weapons get 3 attacks a round. Medium weapons get two attacks per round. Slow weapons get 1 attack per round. That said, we've given some weapons (usually those in the slow category) a little added benefit concerning weapon reach that may allow attacks of opportunity in some cases. They don't actually threaten an additional square, just part of additional squares. Exiting a square one way provokes while exiting it another way, may not (for example).
With all weapons being treated the same, it never made much sense to us from a metagame perspective why all warriors wouldn't run around with greatswords or great axes. No one had any motivation to use a shortsword. Now, they do.
One extra balancing factor, though, is that were using a variant damage reduciton system. So, having multiple attacks with fast weapons (that usually deal less damage) means that the damage reduction is subtracted off of each attack (but there are more chances at a critical per round, too).
I wouldn't just eliminate the -5 cumulative penalty on each additonal attack without doing something to the rest of the way the game works. Our system is working for us, so far.
Another option that we're using is a feat that allows a character to treat a favored weapon as if it is one size category larger only for purposes of dealing damage. So, instead of going the multiple attacks route, a character might take the damage increasing feat, instead. The pre-requisites are pretty hefty, though. Much more than is required for Improved Natural Attack in the MM. And, it only applies to one weapon each time the feat is taken. Improved Sunder just got more valuable, too, because people will want to be able to sunder the guy's weapon if he has that feat.
We probably spent a couple hundred hours hashing out the effects of the various rule changes we were considering. And, these seem very workable, so far.
Please, don't just eliminate the -5 cumulative penalty. It's too simple a solution that will skew the balance of power in the game a little too much for the reasons already posted by others.
