I've got a similar layout as you (except I added a trackball) and I have no problem with the 4-way being at the top of the CP, it's actually very comfortable to rest your forearms on the CP while playing hours of pacman and galaga. I'd use your original design but move the buttons for the 4-way closer to the joystick as I think was suggested by quarterstring. Then I'd move the entire player 2 setup more to the right to open up the middle of the CP so that you definitely won't have some controls in the way of others.
As a last suggestion, I'd also suggest moving both 8-ways and their buttons higher up on the CP so that you have a place to rest your wrists while playing.
I've attached a picture of my control panel which I've been using since January and have had no complaints while playing it as of yet.