Not that I plan to do a mod for this anytime soon, but it is very simple to balance. I would set each weapon to have a weight that is essentially a reflection of how much that weapon would weigh you down in battle. Masterworked and magical weapons can have bonus Initiative or less weight. Then Encumbrance could be set to be much more incremental. Instead of weight in the sense of gravity weighing something down, this would reference the number weight given to reflect how encumbered a person is.
Ice Staff: 15
No armor or weapons would have the best advantage for pure spellcasting, except for magical weapons and armor. Given that Initiative is already at 20, one might make each 5 points of encumbrance subtract 1 Initiative from your overall stat. Armor will make the biggest difference in encumbrance, but weapons will also matter quite a bit. One might even set the penalty distribution to look like this:
0%-20% Encumbrance = No penalty = 20 Initiative
20%-30% Encumbrance = -1
30%-40% Encumbrance = -3
40%-50% Encumbrance = -5
50%-60% Encumbrance = -7
60%-70% Encumbrance = -9
70%-80% Encumbrance = -11
80%-90% Encumbrance = -13
90%-100% Encumbrance = -15
100%+ Encumbrance = -18, -1 Moves
Now that you have a general idea of how you want to have the penalties work, figure out where you want each set of armor to fit.
Leather should give the average unit 40% Encumbrance.
Chain should give the average unit 60% Encumbrance.
Plate should give the average unit 90% Encumbrance.
Now you know what armor should do. You can then figure out exactly how much weight out of 100 each full armor set would weigh. Then give each armor piece a weight to reflect its importance and armor addition.
Then give each weapon a corresponding weight to reflect how cumbersome that weapon would be in a battle. The above weapon numbers were really just starting points. Many calculations would be necessary to get it perfect.
Now special weapons can be considered and given special advantages. Masterworked would weigh less, while Legendary and Magical could actually add Initiative within reason.
All that would make for alot of modding effort or development work depending on who does it. The only real benefits would be a more logical weapon attribute system. Of course many things could be built off of that. There is reason the weapon lists are missing Sword of Haste and other magical weapons that one would expect. Standard weapons do that as a matter of course. I am not sure this is where I want alot of dev time spent since it would be alot of work for very little reward, but it would be much more logical and offer up some new possibilities for unit balance.