Thanks a ton for the detailed response Derek!
1. Leather armor isnt "better" than plate armor. It is cheaper both in training time and resource costs. It is available to more units. But it isn't intended to be "better" than plate for some units. If we made it better we take the choice out of unit design and we enter into a situation where you should use armor a with unit type a, armor b with unit type b, etc. And we have less real options than we do now.
This is a valid point, although I don't feel there is a ton of choice in a knapsack problem. I also disagree that there will be automatic choices if we provide reasons to actively choose leather over plate. For example, it would make sense for a warrior in leather or no armor to be more agile and able to deal more damage than one in plate. Right now, they deal the same damage, but one is simply cheaper than the other.
Part of this issue is brought about because strength is tied directly into both encumbrance and damage (as heavenfall pointed out), so there's no choice there. Dark souls uses an "Endurance" stat to determine how much it can carry, and it might be a good idea to do the same here. Then there might be some choice between armor and damage.
2. Leather increases dex would be weird (im more agile when im wearing leather armor than when im wearing no armor?). But im cool with applying dex penalties at higher encumbrance levels (so units with heavy armor wont dodge or crit as often).
I meant to point out that clothing or robes would give bonuses as well, but that's more work. The math will end up working the same with bonuses as with penalties, so I agree with this. It also makes a lot of intuitive sense. Further, if there ends up being some sort of an endurance trait, maybe encumbrance can lower "strength" as well? It makes sense too. If you're encumbered you're not going to be able to swing an axe with as much force.
3. I think we can do more with traits that impose encumbrance penalties. We can have a trait that gives +10 init in the first round of combat but lowers the units encumbrance by 10 (ie: you have to stay lightly equipped but you get to go first). I wouldn't mind some free traits (ie: no training time cost) whose only cost is they take up a training slot and mess with encumbrance.
This is a good idea as long as the traits that lower encumbrance are kept under control. Encumbrance never seemed to be an issue for any of my units or champions, but for all melee units I tend to put my points into strength since it's mostly a no-brainer. I think you are address this in your fourth point as well .
In regards to champions: Right now there is a sense of homogeny to champions that is bad for the atmosphere and replayability of the game. All champions, mage or warrior, use the best weapons and armor available. Everyone looks the same. I have not had any issues putting the biggest weapons and heaviest armor on all of my champion units. It also seems that the AI does the same. I don't think I picked strength bonuses for my mages, but I may have. Does strength naturally increase over time? If so maybe it shouldn't. Or maybe the "endurance" stat shouldn't.
Also, consider more bonuses and super awesome MAGICAL items for champions only. Leather that increases dex or critical chance would make sense if it were limited to champions, and it would help mix things up with armor and aramaments as well.