In the cmd window you must use single "%" instead of "%%". "%%" is for batch files.
For the paths:
You have several options. You can set files and folders using their relative paths (relative to the working directory, in your sceenshot it's c:\windows\system32\) or their absolute paths. If you use relative paths for the executables it's easiest to put things into %PATH% like StainlessS said so you can call them from anywhere. It's not strictly necessary, just for convenience.
Personally, I usually open the cmd in the directory where the files I want to work on are. Usually I go into the folder using the Explorer, hold shift and right-click on an empty stop and select "open command prompt here" (with Windows 10 it's
difficult). Then working directory will be that folder instead of c:\windows\system32\.
I have ffmpeg, x264, mkvmerge and other vital tools in %PATH%.
Then I can just use the simple commands like my ffmpeg example without writing the long, absolute paths.