You need to have two increases annually. The first is an market/cost of living adjustment that person's salary increases commensurate with prevailing market. To my mind, this adjustment always works in favor of the employee. Therefore, if the market actually paid less for a job this year than last, then the employee would receive no adjustment. All employees receive these adjustments no exceptions.

The second is a merit increase based on their performance. This increase is analogous to a traditional raise. An employee may or may not receive a merit raise based on the incentive system the company has put in place.

Waiting to address poor performance until annual reviews is a horrendous anti-pattern. When an employee is performing poorly, it should be addressed as soon as it is identified. Therefore, a poor performance review should never be a surprise to anyone. Provided that the poor performance did not emerge near the end of the annual review cycle, truly poor performance reviews should be rare because the issue should have been resolved (either by the person correcting the problem or the company and the person parting ways).