Having different encumbrance by race and strength is great, but why not make weight a little less of a factor? The current equation on the wiki is:

(Strength - 20)/200) * Weight] + (Weight/200)

Using something weighted a little more to strength than to body weight (but not too much) would improve the playability of the smaller races without hurting the bigger ones too much. For example:

(40% Strength + 60% Weight) / 2

This adds about 20 lb to the weakest and smallest and takes away 10-15 lb from the biggest and strongest. It's not perfect, because it benefits races that have high body weight but low strength, but something similar would do the trick. Any number crunchers out there? Or, you could add a fraction so that strength plays more of a factor if body weight is below a certain threshold:

... + 10 * (Strength/Weight)