You are absolutely right.  Perhaps even so far as Light encumber =0  Medium -10 and Heavy -20.  My tendency of throwing out numbers. 

Lowering only Initiative won't help when the other guy still won't be able to deal any damage. Incurring a penalty to speed (-1 for heavy), accuracy (-10/-20?) and making dodge somehow more viable (or maybe upping chance for crits and making them penetrate armor?) may create a situation where fielding an heavy-armored offensive army is not viable.

To be honest, monsters should strengthened even without applying tweaks to attack. The early game mobs like bear cubs, rocklings or mites are laughable. What's the point of having a creature that can be beaten by a fresh new level one hero without any scratches? Monsters, even - or especially - early ones, should not be a walk in park AND they should be much more aggressive. If every fight meant serious trouble for novice heroes, maybe we would be seeing early units more often rather than settler spam ahoy.

You have to be careful that the monsters aren't strong enough to beat everything you can field, which is a bit tricky because heroes have access to the same equipment as city-built units.

In a recent game, I spawned right next to the dwelling ground of that snake god who lives in a chasm, so I got frozen at 3 cities and then all the settlable ground was crawling with ophidians. After I scraped together tech that could beat the ophidians, earth elementals showed up. not pleasant. :/

I'd hate for situations like that to become standard.

Who has played age of wonders: Shadow magic?

I always felt the balance was good when it came to higher end unit vs weaker one.

Basicly they had the ability to chip away health, but most unit had at most 24health... Also most faction had a low level unit that its base damage was magical - quickly built and would bypass most armor.

Armor actually improved both absorbtion and damage avoidance but it felt that you could not simply wipe everything out with a single heavy unit, you needed fodder.

I'm under the impression that the major issue is most unit has too much health (the only way to efficiently get rid of heavily armor unit is pretty much magic right now). But reducing health would lead to another headheach - lowering every damage or we are back to glass canon.

So instead, upping the damage a bit for chipping should help (stack off 3 should be able to chip 1 to 3 damages per unit on high end armor, perhaps 1 min per weapon tiers and x2 for 2hders), also adding more natural magical attack, should be so for most beasts... Or allow all faction to build some sort of construct that deals basic elemental damage.

But all in all, so far it has improved much since the initial launch of the game! It is not perfect and has room for improvement, but it is certainly not crippling either.