I'd been using it as written until very recently. Then I read a thread which seemed to say that characters in Conan get additonal feats for being in their favored class.
Drawing on that, I've decided to throw out the experience penalty. Instead, every 5 levels in your favored class, you get a bonus feat. Characters not advancing in their favored class instead get one feat every 7 levels. Humans and half-elves get this feat the first time they reach 5th level in a single class, the first time they get 10th level in a single class, etc.
I can't comment on the full effect, since the game I've started it in has just reached 5th level, and only two characters were progressing single class. I expect it will up power levels by some, but not enough to throw balance out the window.